If Labor is elected in 2016 or 2019, will they follow the Coalition and initiate a round of Royal Commissions? Game Theory, especially "the iterated Prisoner's Dilemma", suggests that "Tit for Tat" is close to an optimum strategy for a co-operation/trust game like Politics. It should be odds-on that Bill Shorten will initiate an NBN Royal Commission in his first 90 days, it's "just good business" for them.

Will the various Ministers, especially Turnbull, face especial treatment, as misleading the Parliament is taken seriously by them? Almost certainly.

But what about the various consultants, like Communications Chambers (UK) and Henry Ergas? Would an NBN Royal Commission find them guilty of any criminal offences?

How do you turn a profitable high-growth, high gross-margin business at the centre of the current rapid transformation of the global economy into an overall negative investment? If you're Henry Ergas, you concoct a deeply flawed Economic Cost Benefit Analysis.

Henry Ergas calculated in 2009 that retail prices for NBN subscribers would be $170/mth, with $133 in the metro areas and $380/mth in non-metro areas. The costs & pricing were modelled for him by an experienced ex-Telstra employee who became the General Manager, Pricing, of NBN Co from Nov-2009 to June-2014, while actual retail prices today are one-third his 5 years old prediction.

Thus, for the most likely estimate of $170 per month, unit costs in metropolitan areas are of $133 per month, while those in non-metropolitan areas are just under $380.

Ergas quotes his own study, now proven to be wildly incorrect, in the NBN Cost Benefit Analysis, as "fact". That's the start of his falsehoods and misrepresentations.

Thursday, September 18, 2014

The mystery at the heart of the Vertigan/Ergas "Cost Benefit Analysis", how you assess the highest-growth, highest gross margin Industry in the country and decide it's not profitable, won't be dealt with in this piece.

This piece is on the mysteries at the heart of the UK's Communications Chambers report, referred to in the Ergas CBA as a "Demand Forecast": Domestic bandwidth requirements in Australia, A forecast for the period 2013-2023.
The CBA is for the 25-year period, 2015 to 2040, yet the bandwidth requirement is only calculated for a single decade. Are we to believe that somehow the final seventeen years of exponential demand growth "fell behind the couch"? No, this was a very considered and deliberate decision.

Peter Martin, Economics Editor for Fairfax in this piece, falls prey to the dual Occupational Hazards of Journalists and Economics: skimming over complex topics and believing their economics knowledge uncovers all answers, even for subtle technical areas they've not sought specialist advice on. Martin is wrong, massively so, in this piece.

Contrast the noise from the Vertigan/Ergas report with a real report from Industry.

Note the description of what a CBA is intended to do.

I'm at a loss as to how a profitable business executing a detailed Business Plan, on-time and on-budget, and running substantially ahead of revenue financial projections, requires an Economic Benefits Assessment to the community. It's already profitable, there is no "Cost" component.

There are two problems I have with the assumptions and methodology announced:

Even under the dubiously recalculated figures, the IRR (Internal Rate of Return) of all versions of the NBN Co business plan is positive, albeit FTTP was 2%, down from the Quigley Business Plan of 7.1%.

NBN Co is not, and never has been, an expenditure-only investment.

The "Cost" of the CBA is zero by definition, and the resulting Cost-Benefit Ratio is infinite.

From the announced revised estimates, there was never a reason to run a CBA, once positive IRR's were established.

On the available Government Funding figures, somewhere between $5.3B and $7B has been injected as equity by the Federal Government into NBN Co.

There is already a directly attributable and precisely measurable economic Benefit of the NBN project: the additional increase in Market Value of listed Telecoms companies.

Howard and Switkowski's legacy was a deeply damaged and uncompetitive business palmed off onto naive investors. The Telstra share price was performing a "dead-cat" bounce and didn't recover until the NBN Co agreements were signed.

Since the 2013 election, it has continued to increase in value, but not noticeably faster.

Alan Kohler was not just right to ask Malcolm Turnbull why Telstra would play ball with him at all, but why they wouldn't screw him mercilessly. Turnbull's promises are now well past their "use by" date and Kohler could be writing a "please explain" follow-up.

This is the note I sent him asking him to reprise his earlier comments.